The Blog

First Credit Card…Lesson Learned

When I think back to the summer of ’95 (That was in the 1900’s. Do we say that yet?) I think about freedom. I think about having high school freshly behind me with the open road to adulthood stretched out in front of me. I was on to bigger and better things that involved going to college, living away from home…and receiving my first credit card.

It was kind of similar to that scene in Titanic where Jack and Rose soar with arms outstretched on the bow of the ship. Only there was no Celine Dion playing in the background. It was Sheryl Crow’s “All I Wanna Do [is have some fun]”.

And fun I had.

I promptly took my new credit card to MC Sports and smacked it down on a brand new pair of $300 roller-blades. It felt amazing. I could skate for 30 days, free of charge.

And I did.

Until the statement came in the mail and all I had in my bank account at the time was enough money to pay the minimum amount due.

“Oh well,” I remember thinking. “What’s a little interest?”

This is the part of the article where I will cue the flashing red light and suggest that if you’ve never heard the term “hindsight is twenty-twenty” you’re about to see an example of it in its finest display.

Not only were my skating outings no longer free, but I owed the bank every penny of that $300 I’d borrowed to purchase the skates. My meager $20 minimum payment didn’t put a dent in the original purchase price. Therefore, Citibank did exactly what it promised to do and smacked me with an interest charge that, quite honestly, seemed pretty insignificant at the time.

It’s that attitude of insignificance that ensnares so many of us in the jaws of credit card debt.

While credit cards are an incredible convenience to our population, (and I will say that, when used correctly, can be one of our friendliest shopping companions), our lackadaisical attitude about how compound interest works puts us in jeopardy of spending vastly more than we set out to spend in the first place. After all, we have good intentions, don’t we?

We really do. But we forget that a little interest compounds into something big and nasty over a relatively short amount of time and before we know it we’ve charged additional items on our card so that we are not only paying interest on the first item but every subsequent item after that.

To follow up with my hindsight on this one, I ended up paying $343 for those roller-blades. That’s nearly $50 more than the purchase price. And to add insult to injury, by the time the payoff was complete, those same roller-blades were completely out of style and selling on a clearance rack for $19.99.

Okay, that last bit wasn’t true, but they were infinitely cheaper than what I’d shelled out months before.

I wish I could say that this first lesson made me a changed woman in regard to my credit card use, but it didn’t. It honestly took me years to learn the ins and outs and to overcome the temptation of having to buy it right now. So I come to my next point. What do we ask ourselves before we decide to take the credit card plunge?

If you’re beginning to think about applying for a credit card keep the following things in mind before you apply.

Interest compounds (quickly). You don’t just pay it one time. You pay it again and again and again until that balance is paid off in the full. Or until the world ends. You choose.

Late payments can come with hidden fees and increased interest rates. Not only is there a good chance your bank will charge you a service fee (typically around $35) for each time you pay late, most banks can and will raise your interest rate, making the total payment increase as a whole. In some cases your somewhat manageable 17% interest rate is now 29% and you feel like you’ve been slapped in the face with a wet beach towel. If this has never happened to you I encourage you to ask a friend to do the honors and then you’ll know what additional interest feels like.

Repossession. In some cases, if you default altogether on your payments, your bank will come to your home and rob you of every article of clothing you have on. No, not really. But in many cases they will take back bigger items that were purchased on your cards. (This is worth reading the fine print to determine exactly what their policy is for this action).

If the decision has been made and you’ve decided to apply, here are a few suggestions that will help get you started on the right foot.

Start with a credit card that has a small credit line. If your bank wants to give you a limit of several thousand dollars and you don’t have a history of using a budget, making payments on time, or are still learning how compound interest works, start small.

For whatever credit limit you choose to keep have at least that much money stored into your savings account. Then, should you learn the hard way that paying items back every 30 days becomes too difficult you can take the money that you saved, pay off the card and run to the nearest shredder to demolish that thing into smithereens. And enjoy the added bonus of learning that a savings should never exist to bail you out of your silly spending habits. This one is painful to learn.

Set up auto payment. If you are inclined to forget to pay your bills, set up online auto payment functionality. This will prevent you from overlooking your payment and being charged with the additional fees and higher interest. Then, once you see that your auto payment has been taken out of your checking account, you can always send more money to pay off the card in full. Think of this as a safety net.

Again, credit cards can be a great tool when utilized correctly, but they will be your worst enemy if your spending outweighs how much you’re bringing in a month.

And as for me, Citibank and I dance a little differently these days. I still own their credit card and I appreciate it more than you know during trips away from home, making online purchases and keeping track of a certain type of spending (for instance, gas for my car). Keep in mind that they now receive a payment from me in-full twice a month. I love the reward points that come from using the card and they’ve even given me and my family some hotel stays on numerous occasions.

And whenever I feel the urge to go out and buy the latest craze, far beyond anything that I could afford to pay back soon, I just have to sit back and watch my eldest daughter zip by on a pair of 1995 vintage roller-blades…